Chinese solar panels - economics or politics?

Unless appropriately managed, the ongoing row on the proposed EU tariffs on solar panel imports from China has the potential to lead to a serious trade dispute between Brussels and Beijing. The Chinese delegation to the EU has not only put out a tough response, it has also arguably mobilised as many as 18 of the EU’s 27 member states led by Germany to oppose the provisional and temporary six-month punitive tariffs averaging 47 percent proposed to be imposed on imports from Chinese solar producers to combat allegedly unfair competition from China.

Under EU rules, the Commission has the authority to determine whether the provisional duties are enacted. But opposition from member states would weaken Commissioner De Gucht’s hand as the investigation moves toward a conclusion in December, when they can ultimately block his proposal. The Commission is investigating alleged dumping of Chinese solar panels and also whether subsidies provided by the Chinese government to the Chinese solar industry amount to an unfair trade practice. The recent imposition of anti-dumping duties ranging from 18.32 percent to 249.96 percent on solar-energy cells imported from China by the U.S. Commerce Department supports the EU Commission’s case.

As in the case of any dumping dispute, reactions vary between the affected units bemoaning loss of competitiveness, profitability and jobs and those of consumers and producers benefiting from the lower priced imports; given the modern distributed production chains across countries, import content of exports is about 40 percent today while the share of intermediate goods in trade has risen to 50-60 percent of global merchandise trade.

The former group usually supports turning to trade instruments to offset the consequent competition effects in the affected economic sector, while the latter also fear economic consequences on other sectors and cross-sectoral efficiency issues. Furthermore, research on average efficiency and costs in the US/European solar manufacturing vis-à-vis production in Chinese facilities do indicate that about 18-30 percent of the price advantage in Chinese solar cells do emanate from cost efficiency of vertical integration, economies of scale, and negotiated discounts from vendors of intermediate inputs, and machinery and equipment. These are in addition to the advantages from lower Chinese labour costs and cheap trade credit availability.

But how, if at all, does this row impact the other Asian giant focused on renewable energy as a means of decarbonising its current and future GDP growth? Several analysts have bridged India into the picture by arguing that India will be a beneficiary as anti-dumping duties on Chinese manufacturers will lead India to become an “alternative manufacturing destination” for companies. The Commission is also assessing the dumping investigations by comparing the prices Chinese companies charge for their photovoltaic products in Europe with those they charge in India, where they are much higher than in China.

The expected gains for India are however contestable, as India’s ability to capture vacated Chinese manufacturing space is a function of ease of doing business in the country, physical infrastructure necessary for manufacturing and domestic policy environment (other than the much disputed labour laws), all of which are not yet amenable for large scale manufacturing processes and units a la China. Despite the local content requirements under the National Solar Mission (NSM), industry experts contend that it is the lack of direction and policy support from the Indian government that is currently holding back solar manufacturing in India.

Additionally, the said local content requirements under NSM are now being subjected to a US-led dispute consultation at the WTO (WT/DS456/1). According to the US, the benefits for solar power developers, contingent on their purchase and use of domestic solar cells and solar modules, would include subsidies through guaranteed, long-term electricity rates, and hence contravenes the TRIMS and SCM obligations of India to the WTO. This is sure to have implications for the NSM provisions as well as the domestic anti-dumping case that India initiated late last year on solar PV imports from Malaysia, China, Taiwan and USA. One also wonders whether the US request for consultation is a retaliatory measure against India’s anti-dumping investigations.

Thus, in view of the protracted slowdown in trade growth below their long-term average rates worldwide and particularly in Europe, it is unclear whether it is the economics or the politics that is motivating these safeguard actions. In fact, research has indicated that advantages from Chinese industrial policy and state subsidy account for only about 3-5 percent of the total price competitiveness. It is uncertain yet how the safeguard actions will redress the relative competitiveness and cost efficiency concerns which is essential for a longer term and viable resolution of the problem.

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